Specified Procedures on the Consolidated Departmental Financial Statements for FY2013-2014

Foreign Affairs Trade and Development Canada
Office of the Chief Audit Executive

August 2014

Executive Summary

Each year, the Office of the Chief Audit Executive undertakes detailed audit work on specified areas of the Departmental Financial Statements. In the past three years, specified audit procedures were carried out in the following areas: Canada Based Staff Payroll, Transfer Payments, Tangible Capital Assets, Locally Engaged Staff Salary, Pension and Severance payments as well as Severance Liabilities and, Revenue on Sales of Goods and Services.

This year, specified audit procedures were carried out on Transfer Payments reported in the draft consolidated departmental financial statements.

Why is this Important?

Departmental Financial Statements are a principal tool for accountability to Parliament. Ensuring the reliability of the information contained within the statements supports sound stewardship.

The Department of Foreign Affairs, Trade and Development (DFATD) is the lead department responsible for Canada’s Official Development Assistance. As such, the Department is responsible for managing the voted financial resources approved by Parliament on behalf of Canada.  The delivery of development aid is in the form of grants and contributions to developing countries through geographic programming, multilateral programming and partnership programming. In addition to development aid, the department also delivers other transfer payment programs to individuals and organizations through a combination of grants and assessed and voluntary contributions.

The FY2013-14 Departmental Financial Statements are the first consolidated financial statements for the newly amalgamated department. They represent the former Department of Foreign Affairs and International Trade (DFAIT) operations from period 1 to 12 and the former Canadian International Development Agency (CIDA) operations from period 4 to 12. Two distinct financial information systems were used for recording the departmental transfer payments. The total transfer payments reported in the draft FY 2013-14 consolidated departmental financial statements were approximately $3.2 billion, approximately 64% of the incurred departmental expenses.

What did we examine?

The auditors carried out specified procedures to:

• Gain a high level understanding of the roles and responsibilities, policies, procedures and controls in place;
• Perform analytical procedures to assess the reasonableness of the Grants and Contributions reported; and,
• Conduct tests of details on transactions recorded in the department financial information systems.

What did we find?

The audit tests for grants and contribution expenditures were conclusive and no significant discrepancies or errors were identified. Based on the detailed testing performed, the auditors were satisfied that the payment transactions tested were appropriately recorded in the draft departmental financial information systems.

As part of the procedures performed, some observations and recommendations related to the overall control environment of the Department were made. The Management Action Plan to address the recommendations is contained in Appendix A.

Conclusion

Based on the audit procedures performed, the auditors found no reason to believe that the Transfer Payments were materially misstated. Moreover, all tested grant and contribution expenditures were appropriately recorded and reported in the draft consolidated departmental financial statements.

The auditors identified control weaknesses for which two audit recommendations are made to address them.

Statement of Conformance

In my professional judgment as the Chief Audit Executive, this audit was conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing and with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. Sufficient and appropriate audit procedures were conducted, and evidence gathered, to support the accuracy of the findings and conclusion in this report, and to provide an audit level of assurance. The findings and conclusion are based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with management and are only applicable to the entity examined and for the scope and time period covered by the audit.

Jean Goulet,
Chief Audit Executive

1.0 Observations

1.1 High-level understanding of processes and controls

In the course of the audit, the audit team obtained a high level understanding of transfer payment related business processes, systems and internal controls in the areas of payment transaction approving, recording and reporting. This understanding helped auditors with the risk and control assessment as well as the development of the audit program and sample strategy for detailed testing during examination phase.

Alignment with Accounting Standards on Transfer Payments

Effective in April 2012, Public Sector Accounting Standard PS3410 on Government Transfer provides guidance on accounting for and reporting government transfers to individuals, organizations and other governments from both the transferring government’s perspective and a recipient government’s perspective. Consistent with PS3410, Treasury Board (TB) Accounting Standard 3.2 covers certain requirements relevant to the government departments’ transfer payment accounting and reporting.

The new PS3410 made the major change that the transfer payments made in advance should be recorded as expenses instead of assets in the Statement of Financial Position when the authority is exercised and recipient’s eligibility criteria are assessed. As a result, all transfer payments are recognized as expenses in the Statement of Operations.

The audit found that the Department has established various policies, directives and guides in relation to transfer payments, including grants and contributions. However, some are out of date and none of them has fully reflected the new requirements of TB Accounting Standard 3.2 or PS 3410.

Internal Controls over Financial Reporting

The Department has developed a Framework for the Management of Internal Control over Financial Reporting intended to enable the Deputy Ministers to provide oversight of the effectiveness of the system of internal control over financial reporting. Internal controls over financial reporting are measures embedded in TB and departmental policy instruments and procedures, which were designed to mitigate the risks of possible misstatement in departmental financial reports. The review of transfer payments related business processes, procedures and control matrix shows that the Department has documented its key transfer payments related business processes and designed internal controls.

Due to amalgamation, the Department revisited financial processes for former DFAIT and CIDA and developed a new list of processes for DFATD. During FY2013-2014, the Department completed all effectiveness testing for the design of internal controls. It plans to complete the overall assessment of its system of internal controls over financial reporting by the end of the fiscal year FY2014-2015. On-going monitoring of key controls has been scheduled to begin in FY2015-2016.

Departmental Financial Information System Integration

Financial information systems are used to collect, record and report financial information for decision-makers. These systems have a direct impact on the quality of the financial information presented in the departmental financial statements.

For the consolidated departmental financial statements of 2013-2014, two financial systems were used within the amalgamated department. The department’s responsible group has developed and made efforts to implement a detailed plan to integrate the two systems working in parallel into a single departmental information system for processing both financial and non-financial information. As per the above mentioned detailed plan, starting FY2015-2016, there will be only one departmental financial information system to be used.

1.2 Analytical Procedures

Total transfer payment expenses reported by management in the draft FY2013-2014 DFATD Consolidated Financial Statements were $3,215 million, of which $85 million was reported as transfer payments incurred on behalf of government^{Footnote 1}. Management provided the listing of all transactions of $3,215 million in General Ledgers.

The auditors conducted expenditure sub-category analysis and performed three types of analytical procedures to assess the reasonableness of the total $3,215 million transfer payment expenses reported in the draft departmental financial statements as follows:

• Comparison of the transfer payments expenses reported with their spending limit by fund type and Voted Authorities;
• Comparison of the transfer payments expenses with those of previous year by sub-category (i.e. grants, contributions, assessed or non-assessed contributions, programs, etc.);
• Comparison of transfer payments expenses reported with other external and internal reports such as Plate III-9a Transfer Payments by beneficiaries reported for public accounts, Vote 10 Grants and Contributions Budget and Forecast information in FINSTAT report prepared by Financial Resource Planning and Management Bureau.

The auditors extracted budget and actual spending data by fund type directly from DFATD financial systems (SAP), then conducted budget and actual expenses data analysis, and performed the reconciliation of total budget and expense amount from SAP source with approved budget and authorities used and reported in the Form A for public accounts. From this analysis, the auditors concluded that:

• By fund type, expenditures reported are within the spending limit;
• Comparing total budget and expenditures reported in SAP with approved budget and authorities used, the difference is minor.

To assess the completeness of total transfer payments expenses reported, the auditors performed a comparison of the total $3, 215 million transfer payment expenses reported in the draft departmental financial statements with the transfer payments by beneficiaries presented in Public Accounts. According to FY 2013-2014 transfer payments by beneficiaries for public accounts, total transfer payments expenditures were $3,152 million; a $63 million difference.

The auditor conducted further analysis of this $63 million difference, and identified that it was caused by the following three items:

1. Refunds/adjustments of previous year’s expenditures $12.5 million received in FY2013-2014 were included in the draft consolidated financial statements to reduce the transfer payments expenses reported. This amount was excluded from Public Accounts reporting.
2. Non-appropriated transactions totalled $78 million was included in the draft consolidated financial statements. This item was excluded from Public Accounts reporting.
3. Foreign exchange net loss of $2.5 million on transfer payments was not included in the draft departmental financial statements but included in the Public Accounts reporting.

For the first and second items, given their nature and different reporting purpose, the $65.5 million ($78 million -$12.5 million) differences are expected and reasonable.

For the third item of $2.5 million foreign exchange loss on transfer payments, the auditors conducted further analysis and discussion with Corporate Reporting Unit (SMOQ). SMOQ agreed that this item should be reported as transfer payment expenses instead of operating expenses. The correction will be made in the FY2013-2014 consolidated departmental financial statements.

Based on the above analytical procedures, the auditors found no reason to believe that the transfer payment expenses reported were materially misstated.

1.3 Tests of details

The auditors performed tests of details on reported transfer payment expenses. The purpose was to assess whether the reported transfer payment expenses were valid, properly authorized, recorded at the proper amount and recorded in the proper period.

A total of 59 transactions were selected for the tests of details based upon a pre-established sampling strategy. This included the following two subsets.

• Targeted sampling: based on the level of risk, a total of 28 targeted samples were selected. They covered the individual transactions equal to or greater than $22 million and some transactions that followed specific accounting processes, such as International Financial Institutions related expenses, matching funds etc.;
• Non-targeted sampling: a sample size of 31 transactions was calculated. TB Accounting Standard 2.2 – Materiality, recommends that departments set quantitative materiality between ½ to 2% of total expenses. Based on a total population $3.86 billion ($3.22 billion for FY2013-2014 DFATD expenses and $0.64 billion for former CIDA (P1-P3) expenses), and a materiality of 2%, the auditors calculated a materiality of $77.2 million for the purpose of testing. To select samples, the auditors developed 11 sampling parameters based on the understanding of nature of transactions as well as the assessment of risk. A judgemental sample of 31 transactions was selected after the consideration of these 11 factors.

For each sample, the auditors vouched reported expenses to the accounting records, such as, invoices, transfer payments agreements/arrangements, Section 34^{Footnote 2} and Section 33^{Footnote 3} approvals and account verification where applicable, as well as other supporting documents. The auditors also assessed whether Section 34 and Section 33 authority were properly exercised through verifying specimen signature cards and the supporting records (e.g. Section 33 account verification checklists and Section 34 checklist where applicable).

For the samples tested, auditors noted the following instances where the improvement of management practices may warrant:

1. Two out of six financial officers in former CIDA who performed Section 33 approval in FY2013-2014 did not have formal delegated Section 33 signing authority;
2. In one case, Section 33 account verification could not be located by Financial Operation (SMFP) for a $5 million grant for global peace to United Nations Trust Fund. Therefore, the auditors were unable to determine whether Section 33 account verification was performed or not;
3. In one of the interdepartmental settlement transaction cases, Section 34 verification was performed; however, no formal Section 34 approval sign-off was found. 

Except for instances noted above, the auditors were satisfied that the payment approval authorities were properly exercised.

In the auditors' opinion, the transactions tested were valid and properly recorded in the departmental financial systems.

 1.4 Review of Transfer Payments Reporting

Compliance with TB Accounting Standard 1.2

The financial statements for the Government of Canada are prepared in accordance with the Government's accounting policies, which are based on Canadian Public Sector Accounting Standards. TB Accounting Standard 1.2 on Departmental and Agency Financial Statements applies to financial statements prepared by government departments for the 2011-2012 fiscal year and subsequent years. This standard ensures that departmental financial statements present relevant financial information in a transparent and understandable manner to Parliamentarians and Canadians.

The auditors observed that the transfer payments presented in DFATD FY2013-2014 Financial Statements and notes are consistent with the financial statements requirements and related model package which are stipulated in TB Accounting Standard 1.2 for Departmental and Agency Financial Statements.

Review of Contractual Obligations

The nature of the Department's program activities, especially the international development program and project initiatives, can result in large multi-year contracts, contribution agreements, grant agreements and obligations whereby the Department is obligated to make future payments in order to carry out its transfer payment programs or when the services are received. In Note 11 to the draft FY2013-2014 Departmental Financial Statements, the following contractual obligations in relation to transfer payments were considered significant and disclosed as follows:

The audit team reconciled and examined the disclosed contractual obligations with their supporting documents. Insignificant discrepancies were noted due to human error and management has agreed to automate the process and to avoid future occurrence. The auditors also tested 8 samples. The results show that the contractual obligations recorded in the departmental financial information system all matched with the Note 11 to the draft FY2013-2014 Departmental Financial Statements.

Review of allowances related to transfer payments

The Department has established procedures for the estimates and the assumptions used for the valuation of assets. Three types of financial assets obtained through transfer payment were identified as follows:

1. Investments and Advances to International Financial Institutions
2. Canada Investment Fund for Africa
3. Loans to Developing Countries and International Financial Institutions

The audit team reviewed the documentation supporting the allowance for valuation established by the Department management. It was found that the estimated allowances for valuation presented in the draft FY2013-2014 Departmental Financial Statements are reasonable.

2.0 Recommendations

As a result of performing specified procedures, potential areas for improvement were identified.

• The Chief Financial Officer Branch should update the departmental transfer payment policies or directives to fully reflect the new requirements from TB Accounting Standards 3.2 and PS 3410.
• The Chief Financial Officer Branch should ensure all financial officers who perform section 33 approvals have formal delegated section 33 financial signing authorities.

The management action plan to address these recommendations is contained in Appendix A.

3.0 Conclusion

Based on the audit procedures performed, the auditors found no reason to believe that the Transfer Payments were materially misstated. Moreover, all tested grants and contribution expenditures were appropriately recorded and reported in the draft consolidated departmental financial statements.

The auditors identified control weaknesses for which two audit recommendations are made to address them.

Appendix A: Management Action Plan

Audit Recommendation 1

The Chief Financial Officer Branch should update the departmental transfer payment policies or directives to fully reflect the new requirements from TB Accounting Standards 3.2 and PS 3410.

Management Action

Corporate Reporting Unit (SMOQ) will start reviewing the whole accounting manual for DFATD in Fiscal year 2014-15. As part of the review of the manual, Chapter 6 (Accounting for grants and contributions) will be revised and amended on a priority basis, if need be, to reflect the requirements of TBAS 1.2 and PS 3410.

Responsible

SMOQ- Corporate Planning, Finance and Information Technology (Chief Financial Officer) (SCM)

Expected Completion Date

March 31, 2015

Audit Recommendation 2

The Chief Financial Officer Branch should ensure all financial officers who perform section 33 approvals have formal delegated section 33 financial signing authorities.

Management Action

Chief Financial Officer recognizes that all financial officers performing section 33 approvals should have formal delegated signing authority, and will ensure that all existing personnel follow related existing policies and procedures.

Responsible

Financial Operations Domestic and International (SMF)-SCM

Expected Completion Date

September 30, 2014